What Is Cash Surrender Value?

Cash surrender value is the amount of money you get back when you cancel a life insurance policy prematurely. Life insurance policies earn cash over time. If you decide you need access to the funds before their eligibility date – you’ll have to contend with fees. Your policy’s cash value, minus any loans and fees you owe the insurer is your cash surrender value. 

We’re going into detail about what is the cash surrender value of a life insurance policy and the difference between cash surrender value vs death benefit.

How does cash surrender work?

If you own a life insurance policy that’s earned a significant amount of cash value, you may have the option to surrender the policy and take the money. Unfortunately, you won’t be entitled to the full cash value amount. That’s because you’ll need to pay fees and other penalty costs for canceling your policy. 

The amount of fees that will be deducted from your life insurance policy’s cash value depends on how long you’ve held the policy and your insurance company’s protocol. The amount of money you’ll end up pocketing after paying outstanding loans, administrative fees, or surrender fees is your cash surrender value. 

Insurers providers often reduce surrender fees by a percentage point each year. For example, your insurance policy’s surrender charge maybe 10% in the first year of owning the policy, reduced to 9% in the second year, 8% in the third, and so on, until it reaches 0%. In other words, the longer you’ve held onto your life insurance policy, the greater the final cash surrender value will be.

Life insurance policies are complicated. It helps to break them down by understanding some common questions. 

What happens when a policy is surrendered for cash value?

Insurance companies will charge you for surrender fees, outstanding loans, and even administration fees. They’ll subtract these charges from your insurance policy’s cash value and grant you the remaining funds, which are called the cash surrender value.

Do you have to pay tax on cash surrender?

You might. Life insurance policies grow tax-deferred over time. However, when you cancel the policy and receive the surrender value, the difference between the money you’ve received and how much you’ve paid in premiums can be taxed as income. 

Is cash surrender value an asset?

Yes. Cash surrender value is considered an asset class. In some cases, you may even be able to take out a loan against your policy or surrender value. 

How do you avoid surrender charges?

The longer you hold onto your insurance policy, the lower your surrender charges will be. Some insurance providers may even waive surrender charges after a decade or so. 

What’s the difference between cash surrender value vs death benefit?

Cash surrender value is the money you receive when you surrender an insurance policy and cash out. Death benefits provide your beneficiary with a financial blanket after the policyholder has passed away.

Example of cash surrender 

Say you’ve accumulated $20,000 on your life insurance policy. An unexpected expense comes up and you need to withdraw this entire amount.  Your insurance provider may charge you for surrender fees, administrative fees, and any outstanding loans before granting you the final payout, known as cash surrender value. 

If you’ve held the life insurance policy for about 10 years or more, you’ll have a better chance of receiving the full cash amount of $20,000 – your cash surrender value will be greater. But if you’ve only held the policy for a short amount of time, surrender fees and other charges will eat into more of your final payout.

How to calculate cash surrender 

Here’s a step-by-step example of how to calculate cash surrender value. 

Step 1: Determine the cash value

Start by finding the total cash value of your life insurance policy. This can be done by adding up the total amount of premiums you’ve paid over the years minus death benefit premiums.

Step 2: Determine how long you’ve held the policy. 

The longer you’ve held onto your life insurance policy – the less you’ll pay in surrender fees. Get in touch with your insurance provider to learn whether they drop surrender fees over time and by how much. 

Step 3: Calculate your surrender fees

Get in touch with your insurance provider to determine the surrender fees you’ll be required to pay if you cancel your policy.  

Step 4: Take into account other charges

Outstanding loans, administrative fees, and other charges will affect your final payout as well. Calculate all the charges you’ll face if you surrender your policy. If you’re unsure, make sure to talk to your insurance agent.

Step 5: Subtract charges from the cash value

Once you have all your figures in front of you – calculate your cash surrender value by taking the total cash value and subtract the surrender fees and other insurance company charges. What you’re left with is your surrender value – the amount you’re able to pocket. 

Surrender value vs cash value

Cash value is money you’ve built up over time from paying your monthly premiums. It’s essentially the amount your life insurance policy is worth. Surrender value is the amount of money you’ll receive from your cash value, once you’ve paid off all the fees and charges for canceling your policy early. 

You don’t need life insurance to save for the future

Life insurance can help ensure your loved ones have a financial cushion once you’re no longer around. But there are also other ways to save for the future – which don’t involve the complexities of insurance policies. 

Take MoneyLion’s Safety Net for instance. This online savings account features access to fully-managed portfolios, auto-save features, and even up to $1,000 0% APR cash advances. Use it for unexpected expenses, to build for the future, and more. The best part? You’ll never be charged for withdrawing funds. Learn more about the benefits of MoneyLion’s Safety Net here!